Credit spreads are tight and valuations across large-cap stocks are elevated. This has paved the way for real assets to emerge as a core allocation to complement traditional portfolio investments.
Real assets, comprising traditionally of infrastructure, commodities, real estate and natural resources, have the potential to offer investors a sizeable tailwind heading into next year.
Roberta Caselli, commodities research analyst at Global X said that despite risks from China’s zero-Covid policy, a strong dollar and tightened financial conditions, commodities remain a bright market spot as inflationary pressures loom.
“Beyond their strong long term investment case, we currently prefer lithium and uranium as both are less subject to short-term Chinese pressures, leading to outperformance this year,” she said.
Governments committed to green energy strategies could also provide a boost to stocks across renewables and cleantech. Indeed, Japan is seeking to restart many idled reactors and create new facilities using next-generation technology.
“Importantly, this new technology and new safety measures are helping to gradually shed the stigma attached to nuclear,” she said.
“Going forward, we believe that these policy changes will be strong tailwinds for a strong growth outlook for uranium.”
More broadly, metals will experience increased secular demand as the shift towards electric vehicles would strongly support copper, lithium and other disruptive metals.
Copper and China
China is a key driver as the world’s largest consumer of copper, accounting for more than half of the total demand. It also dominates refined copper production and is typically net-short copper as it consumes more than it produces.
“The early stages of industrialization are very copper intensive as infrastructure, grid investment, and construction drive economic growth,” said Caselli.
“Lately, China’s zero-Covid policy has weighed on copper prices but still, the market often has a significant snapback rally when China lifts lockdown measures. Positive developments in China could be a boon for the copper markets.”
Indeed, Chris Huemmer, senior investment strategist for FlexShares added that copper will continue to struggle alongside the zero-Covid policy.
“That’s what you’re seeing affecting the copper market,” said Huemmer. “Whilst other markets like iron, nickel and silver have been a little bit more resilient.”
Tools for diversification in your portfolio
While deflationary environments allow for the traditional diversification of stocks and bonds, the inverse relationship is not as clear in an inflationary environment.
“In inflationary environments, you need other tools in your portfolio to be diversified and tools like real assets is typically where you go,” Huemmer said. “That’s why I get frustrated when I hear people say there’s no alternative to equities.
“Real assets are tools that should be a part of a portfolio and in all markets, but particularly in these inflationary periods, these are tools you need to lean on.”
Huemmer added that alongside TIPS (Treasury Inflation-Protected Securities) real assets are helpful when inflation and volatility pose uncertainty.
As interest rates continue to rise to curb inflation, areas like real estate will experience some headwinds for investors. That said, Huemmer outlined that there are attractive areas in this space.
“Industrial REITs are sitting in in a good spot, particularly as companies still try to make supply chains more resilient,” he said.
Part of the way they are doing that is by onshoring more inventory closer to metropolitan areas.
“So, when you order something from Amazon, it doesn’t have to ship all the way from overseas waiting for it on a shipping container, it’s going to be in a storage facility or a warehouse, closer to the end user.”
